About Me

Reputability are thought leaders in the field of reputational risk and its root causes, behavioural risk and organisational risk. Our book 'Rethinking Reputational Risk' received excellent reviews: see www.rethinkingreputationalrisk.com. Anthony Fitzsimmons, one of its authors, is an authority and accomplished speaker on reputational risks and their drivers.
Reputability helps business leaders to find these widespread but hidden risks that regularly cause reputational disasters. We also teach leaders and risk teams about these risks.
Here are our thoughts, and the thoughts of our guest bloggers, on some recent stories which have captured our attention. We are always interested to know what you think too.

Thursday, 6 December 2012

Starbucks has UK sales of £400m annually but arranged its affairs so that it paid no UK corporation tax in the last 3 years.
It paid £8.6m over the last 14 years. In contrast homegrown Whitbread's Costa turns over less but
pays about £15m annually. It's was all legal but the questions was: was it right? Neither UK politicians nor UK public opinion thought so.

Now Starbucks has changed course. It will pay about £10m UK tax in each of the next two years by foregoing tax deductions on coffee purchases, inter-company loans, royalty fees and capital allowances. In other words it is abandoning widely used, generally legal, strategies designed to shift profits from higher tax countries to lower tax countries.

Three questions:

First, who will follow Starbucks? Amazon? Google?

Second: Does a system that encourages corporation tax avoidance overlaid with voluntary tax donations make sense?

And third, will the Chancellor now consider dropping all corporation tax deductions (except perhaps bad debts) and setting an ultra-low flat rate of corporation tax?

Sunday, 11 November 2012

Just when you hoped it couldn't get worse, the BBC's crisis just
did. It's new Director General, hit by two scandals since he arrived on
17 September, has resigned.

The first scandal was inherited - dating back decades; but the second one,
a badly misjudged editorial decision, was ultimately his responsibility
as BBC Editor in Chief. An honourable man, he decided to resign.

This leaves the BBC and the BBC Trust in quintuple trouble.

The BBC has lost its DG partly as a result of poor crisis management which has left it rudderless in a hurricane. Its many enemies will be rejoicing.

The
hurricane is also a sign of failed crisis strategy. That reflects
badly on the BBC. It ought to understand crises since it analyses the crises of others daily. But it's not the only
organisation that routinely deals with the crises of others but turns
out to be unable to handle a crisis about itself.

Third, the BBC now has only an acting DG, the no doubt talented Tim Davie.
His last role was head of Audio and Music. Leaving aside the problems
of being an Acting DG parachuted into a crisis, he appears to have an
English degree and a career spanning brands, marketing, music and drama -
but never to have been in charge of news. That isn't an obvious
pedigree for an Editor in Chief taking office during a potentially
existential maelstrom unless it partly reflects Tony Hayward's comment that he needed an acting degree to handle the Deepwater Horizon crisis. I wish him good luck, excellent judgement and a solid constitution.

Fourth, the DG's manner during both crises, particularly the second, suggests that the he may have been an example of the Peter Principle and promoted one level beyond his natural level of competence.
If so that explains the personal tragedy for the now ex-DG; but it has also put in
question the judgement and reputation of the BBC Trust as well as the
BBC. The Trust appointed him.

And fifth, there is of course the question of the degree to which the BBC's organisation is, to use a phrase the BBC often uses, fit for purpose. The structure that the DG inherited clearly did not serve him well. Lord Patten seems to accept that the organisation needs a "radical structural overhaul". That may well be part of the problem - an easy part to solve. But to judge by the evidence of 'events' so far it's far from all that's needed.

As I've written before,
the BBC must find and fix the fundamentals. Whatever the
constitutional niceties, Lord Patten will have to take the
lead in these exceptional circumstances. He has every incentive to do so since his personal reputation is now at risk.

But he won't succed in fixing the fundamentals unless he finds them all. Fast and systematically. As I've also written before, the current enquiries won't find them.

If
the BBC doesn't find the fundamentals, it can't fix them.
Which will leave the BBC teetering on a cliff edge, no place to
leave the nation's favourite Auntie. The BBC is much too important an institution to be allowed to collapse or be dismembered.

Saturday, 10 November 2012

On 2 November, a flagship news programme 'Newsnight' carried allegations that an unnamed "leading Conservative" was a paedophile. A media frenzy identified the alleged perpetrator. On 9 November, his accuser, apparently shown the alleged perpetrator's photograph for the first time, sorrowfully announced that this was not the right man. Result: an abject apology by Newsnight and discussion whether the BBC's Director General's head should roll. In true BBC style these included an interview with the BBC's Director General on 'Today', BBC radio's flagship news programme.

The BBC is still reeling from a second recent 'Newsnight' scandal, in which another paedophile investigation, into the former BBC star Jimmy Saville was canned - only for its commercial rival ITV to broadcast the allegations. As I wrote here, many of the issues are shared with the Jimmy Saville episode, but a new one has emerged.

It seems that the latest Newsnight debacle emerged from a "collaboration" with the Bureau of Investigative Journalism. To what extent, and why, the BBC outsourced or subcontracted its investigation to outsiders is not yet known.

One of the many lessons of lessons of the Deepwater Horizon explosion and the UK rail crashes of 2000 and 2002 is that outsourcing and sub-contracting are more risky than leaders recognise.

There is little doubt that outsourcing can save money. But particularly if it involves 'core' operations, outsourcing often saves money now at the cost of increasing risk for the future.

This is not only risk of those core operations causing harm to the outside world. Outsourcing puts the risk of causing severe reputational damage to the company into the hands of its sub-contractors and outsourcers. But particularly where core operations are concerned, the public never allows an organisation to outsource its responsibility if things go wrong.

This trade-off is often overlooked and too infrequently discussed by leaders under pressure to 'save money now'.

Outsourcing is fashionable and can save money. But poorly managed it can led to short term gain at the cost of long term pain. The wise prefer short term pain for long term gain.

Saturday, 3 November 2012

Are teachers cheating when marking public examinations? Ofqual, the UK exams regulator, thinks so - though it invented the term "overmarking" to describe the phenomenon. It ranged from giving pupils too much 'benefit of the doubt' through to giving pupils marks calculated to lead to the highly coveted "C" grade. The full report is here.

This is a classic case of incentives positively encouraging unacceptable behaviour.

In England, there are very strong incentives for schools to have as many students as possible get at least a Grade "C" in the English GCSE exam. In interviews of about 100 schools, Ofqual's press release reported:

"While no school interviewed considered that it was doing anything
untoward in teaching and administering these GCSEs, many expressed
concern that other nearby schools were overstepping the boundaries of
acceptable practice.

The report states: “The pattern of marks – the unprecedented
clustering around perceived grade boundaries for each whole
qualification – is striking”."

Cheating is far more widespread than you think. We don't recognise much cheating because we rationalise it into 'normal' or 'acceptable' behavour.

Dan Ariely, a behavioural psychologist/economist, has made a special study of the subject. He has summarised the core of his findings in an entertaining short RSA Animate. For more read his book "The (honest) truth about dishonesty". It should be compulsory reading for business leaders and regulators.

So watch out! Teachers are far from the only people who cheat! Most people do it to levels they rationalise as 'acceptable'. But there's no need to design incentives that positively encourage cheating.

Tuesday, 23 October 2012

It's well established, by 'Roads to Ruin',
that behavioural and
organisational risks both cause crises and tip them into reputational
catastrophes. Igonorance of these risks, which is widespread, leaves
leaders living in a rose-tinted bubble. Until the bubble bursts.

To judge by what has emerged so far in the Savile debacle, it's likely that fundamentally important risks at the BBC include:

poor internal communication that leaves leaders in the dark about important information

a culture that leads to turning a 'blind eye'

a culture of "what's normal around here" that doesn't stand external scrutiny

inability to see themselves as outsiders see them

inability to learn from past mistakes

incentives not to 'rock the boat'

inability to see or deal with fundamental risks to their licence to operate

Sunday, 21 October 2012

It's becoming the latest theme for international companies. Not paying a fair amount of tax in countries where you trade makes you a bad citizen and damages your reputation. The first of the recent batch was Starbucks. Now its Ebay and Paypal.

As Anthony Hilton quoted
the senior tax partner at a Big Four accountant recently, "I think I
have done a good job for my client saving £10m on their tax bill. Then
I find it cost them £100m in reputational damage."

Thursday, 18 October 2012

Starbucks has UK sales of £400m annually but arranges its affairs so that it has paid no UK corporation tax in the last 3 years. It has paid £8.6m over 14 years. Whitbread's Costa turns over less but pays about £15m annually. It's all legal but is it right? And who decides?

Before social media, companies could make tax avoidance decisions confident that their ultimate customers wouldn't find out, or if they did, they wouldn't be able to do anything about it. So the company's decision was left unchallenged. As long as it was legal, that was fine. End of story.

No more. A second question now has to be asked: 'Is it right?'

It's not the company's resident ethicist who has to answer. Particularly when customers can easily defect (coffee), the stakeholders that matter most are the ultimate customers. Even where defections aren't easy (banks) politicians can dispense plenty of damage if they think their constituents don't like what they see.

For Starbucks, now roundly made a subject of mochary even in the FT, and apparently facing a "brand catastrophe", retail customers matter most. The internet makes it easy to organise boycotts against those seen as bad citizens. If it ain't right in the public's eyes, beware of customer defections. Or having to spend a small fortune avoiding them.

Anthony Hilton quoted the senior tax partner at a Big Four accountant yesterday. "I think I have done a good job for my client saving £10m on their tax bill. Then I find it cost them £100m in reputational damage."

Friday, 12 October 2012

But more disturbing is the revelation that what must have been hundreds, perhaps thousands, knew or suspected his wrongdoing over periods said to be as long as decades - but did nothing. Accusations of 'turning a blind eye' or inaction have so far been levelled at the BBC, three hospitals, the UK's Crown Prosecution Service and the police among others.

Passive covering-up of important but unwelcome information is commonplace. Ask yourself what unwelcome news wasn't promptly passed on up to your organisation's leadership over the years. The reasons vary, but they are typically a combination of culture, power, incentives such as fear and a lack of leadership, particularly on ethos. Groupthink, particularly among the organisation's leaders often contributes too.

Sadly Jimmy Savile isn't the only cover-up in the news. It's alleged that a number of the UK's police forces have been involved in a masssive cover-up following the 1989 Hillsborough Disaster in which 96 died. It's so bad that the Independent Police Complaints Commission is investigating whether there was a concerted effort by two police forces to pervert the course of justice over more than 20 years. There are also investigations under way into whether the police should now be charged with manslaughter.

If proven, this goes far beyond passive covering-up and raises the question why multiple police forces set out systematically to cover up the truth. If proven it would be a small step for the IPCC to conclude that the police showed institutional dishnonesty that has a parallel in the institutional racism found in the Metropolitan Police following the Stephen Lawrence Enquiry.

Getting to the root of this kind of problem is difficult and can be painful. Unresolved, it exposes the organisations concerned to one of the most potent destroyers of reputations - that the organisation comes to be seen as dishonest or dysfunctional.

It will take courage to get to the root of these problems and leadership to solve them. The question is whether leaders are up tothe task.

Sunday, 15 July 2012

It all began, in April 2013, 2013, with JP Morgan's ebullient CEO Jamie Dimon dismissing the stories that hedge funds had reason to bet against JPM's 'London Whale' as a “tempest in a teapot.” There can't be any doubt he believed what he said.

By 11 May, Dimon was calling a press conference to explain a $2 billion trading loss. Again no doubt he believed it.

Two months later, its been announced that the losses are nearly $6 billion. He must be hoping it is true.

Something is clearly preventing Dimon and his board from knowing what is really going on within the business.

As Justin King said, you can't make good decisions without good information. Garbage information usually means garbage decisions however talented the board and management.

So here are some $64 billion questions for the Board.

How much more of the information getting to JPM's board is garbage?

Which bits might be unreliable?

How much information might be missing - and in what areas?

How can we reliably find out?

What might be causing us to have an information problem?

And while we are about it, do we fully understand everything that is going on at JPM?

No-one should think this is just a JP Morgan problem. 'Roads to Ruin' demonstrates how defective information flows can bring down empires - it's a frequent cause of corporate disasters. All boards should be asking themselves questions like these.

Tuesday, 10 July 2012

"The culture at Barclays, [in 2006/7 when he worked there] discouraged
staff from raising concerns; in some instances, their loyalty and
commitment were questioned, should they do so. There was also the unsaid
threat that it could adversely affect any potential bonus or, worse,
undermine their job security."

This describes a classic
example of incentives, both cultural and financial, blocking the flow of
important information to the top. Underlying it is a failure of leadership on ethos and culture.
Incentives and failures like these are almost impossible for boards to
uncover without outside help - the more so in large complex
organisations.

This single letter illustrates four of the seven key risks highlighted in 'Roads to Ruin' as a major cause of destruction of apparently solid businesses. And it left NEDs without key infomation they needed to be able to supervise the business effectively.

Thursday, 15 March 2012

It usually takes a crisis for the outside world to find out what is really going on inside a big corporation. But on 14 March, the disillusioned Greg Smith, a middle ranking banker, left Goldman with a flourish - giving an insight into Goldman Sachs for the New York Times (also covered here in the FT).

Reinforcing this picture, he reports that many leaders at Goldman apparently despise their clients: "I have seen five different managing directors refer to their own clients as muppets, sometimes over internal email."

Making it clear that he does not accuse Goldman of anything illegal, Mr Smith concludes:

"It astounds me how little senior management gets a basic truth: If clients don't trust you, they will eventually stop doing business with you. It doesn't matter how smart you are."

If Smith's narrative is right, Goldman is losing the moral compass that once inspired its alumni whilst its board claims good intentions but sets incentives driving amoral behavour. If so, what does this say of Goldman's leaders?

The most obvious options are that they are, to use their own terminology, "muppets" who don't know what is going on in the Goldman engine room; or that they are somewhere between amoral and dishonest. Neither is an attractive characterisation.

Survival for the long term becomes harder if people think you are untrustworthy or incompetent - the more so if you are untrustworthy or incompetent. The toxic track record listed by Smith makes Goldman more vulnerable to a new crisis turning into a catastrophe. And that's before thinking how angry, influential alumni, seeing their once valuable Goldman pedigrees transformed into an embarrassment, could seal Goldman's demise should they run into trouble in the future.

The question for clients is no longer "Can we do without Goldman?" It's become "Can we risk using Goldman?" If clients (or their customers) think "Goldman Sucks", it could become as risky to hire Goldmans as it is for a retailer to sell products made with slave labour.